Procurement Intelligence Unit

Hi Jonathan,Thanks for this interesting link, but honestly, I really wonder about this Accenture's 'long-term trend' on manufacters that would move their plant outside" Asia and closer to US locations. I think Accenture is missing a major component of investment in Asia in this analysis: the growing domestic market and the emerging middle class in Asia (mostly China and India).Where will be the market tomorrow? In the long-term?

Population in China
2010 - 1 330 141 295 - 1st World
2025 - 1 394 638 699 - 2nd World
2050 - 1 303 723 332 - 2nd World

Population in India
2010 - 1 330 141 295 - 2nd World
2025 - 1 396 046 308 - 1st World
2050 - 1 656 553 632 - 1st World

Population in USA
2010 - 310 232 863 - 3st World
2025 - 357 451 620 - 3st World
2050 - 439 010 253 - 3st World

So, if company are really relocating their plants in the US... I would consider it's a short-term strategy and not really a long-term one.Best,Sylvain

Interesting statistics. I suppose the lesson here is proximity to market. At the moment, the pattern of world trade still revolves manufacturers in the East exporting to consumers in the West. But, as your numbers suggest, we might see more a consumer class emerging in the East that has effective demand.

In which case, you would imagine that the the factories, therefore, would have to relocate to the East in order to forge a closer supplier-buyer relationship to meet procurement's 

In the news this morning, this interesting article about Flipkarthttp ://on.ft.com/i7bdkP

"What happens when the world’s second most populus country turns to reading? A really big market. ... So sure are the duo of the growth potential of India’s online retail market, that they have set a sales target of $1bn by 2014-2015."

This is very important and relevant topic. I also know that some of European companies start to move their production from LCCs, e.g., China, to (more) local places such as east of Europe.
I think it is because of several reasons; firstly because the labor cost is quite low in those regions and also it is expected that the labor cost in China will be growing. Meanwhile, the transportation cost is much less, particularly, if they want to focus on European markets.
And more importantly, they like to reduce the exposure of the SC to lots of risks involved in the global business in our complex unpredictable world: risk of transportation, risk of currency fluctuation, risk of social instability, etc.

One is:
Many companies failed on LCCS, and have to go back to where they were. These same old benefits are good cover for failure.

My view may not be music to ears for many, and probably not true for some companies who have pulled back to near-shoring.

My apologies to those who may feel differently.

Well, there's no any particular solution that's considered best for all situations or conditions. It depends on a multitude of factors.

For mass production usiong DFM (design for manaufacturing) it then depends on the manufacturing footprint.

If logistics cost is a major consideration, and FG (finished goods) hubs need to be near the end customer or consumer markets, then near-shoring would make sense.

At the end of the day, it's the total cost - leadtime, turnover cycle time, cusotmer delivery, inventtory management (especially FG), customer service, would determine the strategy.

For the retail markets, e.g. Walmart and even convenience stores like 711, it would be ideal to operate on a cross-docking type operations strategy. Replenish the shelves as and when needed, with as little inventory hold as possible, a well managed turnover and leadtime cycle.

If it's mass volume stnadarddised electronic goods, where economies of sclae is needed, then it's a must to figure out the manufacturing footprint serving the end user markets, where the FG hubs locations become crucial.

I think whether off-shoring or near-shoring shouldn't beome a fad without careful consideration of what a business really needs.

Well if this is a long term trend then should be reasoned by some good arguments.Maybe the equation price-quality-logistics is now balanced with the 3-rd element like the logistics....

I believe Dan is correct! I would also take a deeper dive on the subject, by adding that (& although a critical factor, I exclude the obvious regarding fossil fuel $), for years Economic Futurist have stated "it would take a global economic crisis, on the scale of the great U.S. depression to right-size continental wage structures in the manufacturing markets". Thus, allowing the MFG's to economically produce closer to their consumers.
In 2005, the consensus among Futurist was to see a shift to more near-shoring within the first 5 years of recovery & then trending to a more consumer based demographic shift! I would have to believe that if the later is to unfold, we should begin seeing MFG's or their holdings companies buying up real estate while it's at all time lows, as part of their 5 & 10 year plans ( all assuming that an economical work force will be attainable, at that time). So far all thumbs are up as we watch phase one of a global transformation that will change our Future practice & methodologies. This is a great topic & cerebral exercise for collaboration, as we weigh potential impact risk, benefits & future strategies for our specific trade.

Paul

Your comment made me thought a lot!Actually I felt only the surface of the ice when I remark the logistics as a common sense ( one will be hapier to produce closer to consumer then trouble to import overseas).But the rest what you said is quite quite interesting : lowering the wages due to the crisis as the way to balance the logistics.Well this is quite unexpected for me now regarding US , Eu , Japan or other big consuming markets.I agree that you rather produce in Eastern Europe , Mexico , or Brasil rather then in Asia but I very much doubt now that it will be possible to lower the wages on the consumer markets to be able to balance that much to produce back on the traditional consumer markets.
However is a very interesting exercise , beeing in my opinion , just a part of the global trend that will govern and lead the future world.And , as always , the people from procurement will open the roads......

Logistics is only 1 factor, so is labour (i.,e. wages). Manufacturing footprint and FG (finished goods) hubs might need different strategies. Leadtime (procurement), turnover cycle (i.e. POS), inventory management, customer fulfillment, etc need to be considered.
I have been challenged in previous jobs at retail level implementing "cross-docking", replenshing the shelves as and when inventory run low - practically eliminating warehouse and inventory carrying cost. Walmart and MacDonald's would be good examples to study.
Off-shoring or near-shoring depends a lot on the business you're in and the effective operations model needed for execution.
Good luck in your quest for the ideal solution.

I think what is key in making a sourcing decision is to have a good cost and risk assesment matrix. Every industry is different and this is not a "One size fis all".

Hi Peter don't you think that most of what you mentioned above is logistics?
From supplier development point of view there is not only logistics and total cost of ownership , involves more than that.

Yes, I'm talking about FG and retail as an example. If it's manufacturing, and assembly of products, it'd need to be the manufacturing footprint and FG hubs.
Toyota has its manufacturing town plan - colocation of many strtegic suppliers, to minimise level of inventory (material, WIP included)
Even Nokia has its Chennai facility plan where certain bulky parts/components for final assembly needs to be colocated closely to reduce cycle time and inventory. 3PL & 4PL were enlisted in such cases, to implement SOI (supplier owned inventory) and VMI (vendor manged inventory), incentives from the suppliers perspective to keep inventory as lean as possible.
Now, the final piece of the jigsaw puzzle is How to ship the FG to the customers in the shortest cycle time, with emphasis on customer fulfillment and service.
Obviously, the FG hubs need to be close to the customers served. It all depends on the type of goods you're delaing with.
For standardised products with no difference for the global markets then consolidation of manufacturing footprint is probably a good choice.
For mass customisation, looking at Swatch for example, the final assembly and FG hubs should be close to the end customers. If you look more closely, all Swatch watches use very similar internal components, so the manufacturers (supply base) could be outsourced into a few major locations where economy of scales matter.
the final assembly of the external parts like the casing and straps, you could go with suppliers with global footprints near your customer base or have a few more regional huge suppliers to serve in the consolidated regions.
Leadtime and POS turnover cycle (minimising inventory level) is a major cost factor. Imagine the your cash flow cycle - where you could collect cash quicker from your customers (AR) than your payment to suppliers (AP), you have a business case of reducing cost or ROI already.

I can not see the link between the AR and AP for the issue that we are talking about , but I can tell you that for example Nokia in Romania works without having the suppliers around ( and this goes on for more than 3 years).
The point is that even if I want to have the supplier at my door and to serve the customer with a very short logistic chain , this might not be enough all the time.Reason : the desired quality is more expensive at your door in your enviroment than elsewhere , or the work force itself is more expensive , or the goverment policies , or the banks , or the raw material or.....

I agree with you from logistics point of view , but what Paul underlined above is the trend to move from the LCC to NEARBY CONSUMER MARKETS , and most of all , the causes of this movement.
Paul found one interesting cause , the levelling of the wages due to the crisis.Could also be the raw material or other causes , that justified the recent moves from Asia closer to traditional and powerful consumer markets from US and Europe. Anyhow this shows a trend that could be a very strong one in the near future leading , perhaps , to something new in the global economy.

It's great to see that so much interest has been sparked by this issue. Moreover, it's intriguing to note that the subject that sparked these thoughts has yet to be mentioned: the Japanese earthquake and supply chain vulnerability.

It seems sensible, as Peter has mentioned, that each sector and business will develop a supply chain model which best aligns with its own business objectives. Although, as Ban noted, logistics prices have been falling over the last years, the rising cost of fuel can only reverse this trend in future years. Given the inflating wage level in emerging economies, and the increasingly expensive nature of long transportation routes, surely we shall see 

Look at the TCO. Nokia ruled the handset industry for a while with DFM (Design for Manaufacturing) model. So, it depends on the overall business as well as operations models.
First, do you know all the factors that contribute to your TCO? Next, how do they intewract? I'm not even talking about combinations of the factors/variables, I'm talking about interaction at the permutaiton level - daily operations.
So, labour cost is only but 1, and in fact, to me un less it's labour iuntensive and the weightage is more than 20%, what the advantage of having a 10% lower labour rate that eventaully only contirbute to 2~3% of overall cost?
Logistics, leadtime that impact inventory level (warehouse, WIP, FG, etc), time to market (from the moment you receive an order to customer fulfillment) - what cycle time is needed?
It's more complex than what's been discussed and very often, every function works in silo and has its own KPI and objectives - and every staff's behaviour will be driven by the scorecard and KPI (performance driven).
I've already seen this in automotive, pc and communication (including handset) industries.
GM has a JV with Toyota in California, but Toyota's culture and way of doing things had never rubbed off on GM. The rest is history and you can read all about them.
I've supported the category (sopurcing) management team as well as the purchasing (operations), work in projects and look at processes (including operations).
I've also been involved with business planning and supported the marketing function (including the account teams). I'm still trying hard to find a process that would tie the whole organization - from sales & marketing, finance all the way through the supply chain functions (that all usually at least 2 to 3 departments involved).
From the receipt of a custromer order till customer fulfillment, the job is not considered done.
I don't expect people to even come close to understnad what I'm trying to articulate 1/2 the time. But I'm still trying.

Well Peter a 2 or 3 % from the wages , together with a 7 or 8 % from the material together with a 10% from the technologie itself( from the process improvments that allows the cost to go down at the supplier) and also a 10 to 15 % from the logistic cost , you already have a 30 % cost reduction.Don't you go for it?
The project type approach is more than usefull if it is imposed by the company mangement.My experience showed that has delivered great results working in cross functional teams VERY WELL COORDINATED.I am speaking now from the point of view of Supply chain specialist who is in charge of coordination the project team.
I repeat this type of approach is the best to near us to the result of the anser to the question to the topic of this discussion.

Yes, if it's that simple - then go for it!
Like I've mentioned before...LCC like Foxconn in China could lower the piece part cost because they could provide higher through-put and also they have large volume purchase of material, as much as 5~10X compared to some customers in some cases.
It's not a simple formula, you should go ahead and list down the 10+ cost drivers and see how that cost model would stack up, to really understand what's going on.
I'd prefer to give some tips and guidlines, and frankly I don't want to get drawn into a very long discussion when it becomes difficult to articulate the intricacies in a complex operation environment.
Example, I have Chinese suppliers who could supply zinc die-casting parts weighing 120~130g per pc at a lower pc-part cost (FOB) than any in Malaysia, and the plant that needs the part is in Penang, Malaysia.
TOC - 1) raw material, 2) tooling, 3) die-cast machine rate for die-casting itself, 4) manufactuiring processes - drilling, plating, etc, 4) through-put, 5) PPM - 1st pass yield rate, reworking needed, 6) packaging, 7) leadtime - raw material, die-casting, and other processes, 8) Leadtime - logistics, 9) Inventory level - FG, WIP, material, tooling (spare needed), 10) Labour rate, 11) Overhead - floor space, indirect labour, utilities, etc, 12) Profit margin
When in actual operations, does the supplier have a Qaultiy system in place, how do they deal with rework, process control, their purchasing of raw material, machinery, etc.
Supplier resources - number of staff, skill level, customer service, especially cycle time in addressing operation issues.
I've to deal with the raw material supplier if I decide to consolidate the purchase of the raw material for the global demand which is of larger qty than their total purchase.
I've to deal with the logistics supplier because I've the global demand forecast and production schedule to deal with.
So, I basically need to know my business stakeholders' demand forecast and needs, managing the manufacturing footprint, including every die-cast supplier's manufacturing site, my FG hubs, in order to negotiate and distribute the demand plan to the various suppliers to optimise my supply chain efficiencies and effectiveness.
Now, does that answer your questions.

BTW, the complexity I deal with - 3 major business stakeholders locations, US, Asia, and EMEA. Suppliers with mutiple manufacturing sites - 1 supplier has 2 sites (Singapore & Malaysia), 1 supplier (China & East Europe) 2 Chinese suppliers, 1 supplier (Singapore & Thailand), a few US suppliers. A few more potential suppliers waiting on the sidelines.
The US suppliers quotes for some 5 parts were 30~40% higher at piece-part level. Who do I turn to then? Which supplier? Which manufacturing location - China, Malaysia, Singapore or East Europe?
What factors would you consider in making such a decision?

Peter I like this challenge because I have been through this many times.

If you follow a project mangement concept you will approach the best possible solution with the highest probability.

Just put in the cost model ( whatever it is set up or used by your company or made one by yourself) the pure cost figure consideration.Weigh them by number and make the comparison between different suppliers. The rest , SPECIALLY THE QUALITY AND TECHNICAL ABILITIES OF A COMPANY which is more difficult to be assed through costs , will be assed by audits , or assumed and decide to develop if there are reasons for.But you will do this through project mangement steps inside of a team.WHY ? Because if you are not a superman to know everything then you need the support of the rest of the organisation.They will grant the support BECAUSE THE TOP MANGEMENT SET THE RULES IN THIS WAY.You are not alone and your activity impact at a large scale the P&L of the company. In this way a procedure is set up , and you will know all the time what are the steps to be undertaken , follow and accomplished.Maybe seemed to be long , hard , difficult , and somehow rigid , but in this way I made good long term decision with good impact on the company profit.

If you do this , then you will have a TOOL to consider and solve the problem from the second message too.I do not know the details of the project you mentioned there , but EVEN IF US QUOTED 40 % HIGHER I would not be afraid to buy from them if the rest of the criteria are met , rather then paying the COST OF POOR QUALITY from another very cheap supplier ( I am not talking about the reason for what is cheap) which could be money or stopping the delivery to the customer.
Give me more details on the project that you curently are working on , and I could be of more help maybe.

Thanks. These are projects I've been thorugh the last 5 to 6 years.
Projects that cover not only manufactured parts - like die-casting, but chemicals for downstream, logistics, and even marketing services.
I've also looked at logistics from both the In-bound hub (materials & WIP as in modular parts), as well as FG hub.
Back in 1999, Chanel was already embarking on establishing an ERP system to link front-end POS data & information to back-end manufactguring operations, to ensure that valuable market demand info is feedback to the operations -- to help formulate demand forecast & for production planning. The inbound hubs impact manaufactguring ops directly, but products shipped to wrong FG hubs where demand and FG turnover is slow would caused Lost Revenue (Opportunity Cost).
Also, AR & AP impact operating cash-flow. Contract T&Cs are important, every minute detail. Dell's back 5 years ago had AR cycle of about 41~42 days but AP of b/w 55~60 dyas. Now, that operating cash-flow that's important impacting a co's financial health.
Also, I negotiated such details in T&Cs, every week of cash hoard contribute to the bottom line.
Project mgt or not is only the start, with a porper process for formulating strategies, then comes the implementation & execution. I've been throught those already.
I've help the Global Category Mgr 1x when we hedged the steel matertial cost, asking the supplier to lock in a 6-mth contract for steel back in 2005, and the cost saving or avoidance contributed 3~4% to thte total part cost.
There isn't any fixed formula or strategy per se for any market condition, that's my point.
If any supply chain professional could understand, grasp and apply all the above I've mentioned he/she should be in good shape.
Cheers